FERC Revises Offer Caps in Regional Wholesale Electricity Markets

On November 17, 2016, FERC issued Order No. 831, revising its regulations regarding incremental energy offer caps imposed by Regional Transmission Organizations (“RTOs”) and Independent System Operators (“ISOs”). As a result, RTOs and ISOs will be required to cap each resource’s “incremental energy offer”—the portion of an energy resource’s supply market offer that can vary depending on output or demand levels—at the higher of $1,000/megawatt-hour (“MWh”) or that resource’s verified actual or expected cost-based incremental energy offer. RTOs and ISOs must also cap verified cost-based incremental energy offers at $2,000/MWh when calculating locational marginal prices (“LMP”). According to FERC, Order No. 831 will reduce the likelihood that offer caps will suppress LMPs below the marginal cost of production, as well as ensure fair compensation for generators and more efficient resource dispatching from grid operators.

In June 2014, FERC opened a new proceeding to consider price formation issues in the organized energy and ancillary services markets operated by RTOs and ISOs. In particular, FERC stated that it was concerned about whether the incremental energy offer caps in these markets were just and reasonable under the Federal Power Act. With the exception of the PJM Interconnection LLC (“PJM”), all six of the FERC-jurisdictional RTOs/ISOs currently have incremental offer caps of $1,000/MWh. Although PJM imposes a $2,000/MWh hard cap when calculating LMPs, PJM also allows generators to exceed $1,000/MWh offers provided that they are cost-based. For non-PJM generators in other RTOs and ISOs, their incremental energy compensation is limited to no more than $1,000/MWh, even if they actually incurred much higher costs. In FERC’s opinion, this cap poses a particular problem during times of high demand and congestion, when energy costs are much higher, such as the “Polar Vortex” winter of 2013-2014.

In Order No. 831, FERC found that the current incremental energy offer caps were not just and reasonable for several reasons. First, FERC determined that they prevent generators from recouping their full short-run marginal costs to the extent that they exceeded the cap. Second, FERC concluded that they tend to suppress day-ahead and real-time LMPs, thereby obscuring the true cost of serving demand. Third, and relatedly, FERC asserted that the resulting inaccurate LMPs result in inefficient market signals to consumers and other generators during stressed system conditions. Finally, FERC stated that the $1,000/MWh price caps can discourage resources with higher, but legitimate, short-run marginal costs from participating in the market, notwithstanding that there may be a demand for such energy.

Taking corrective action under its Federal Power Act section 206 authority, FERC ordered RTOs and ISOs to revise their tariffs and include three requirements relating to incremental offer caps. First, incremental energy offers must be capped at the higher of either $1,000/MWh or the resource’s actual or expected cost-based incremental energy offer. Similar to PJM, incremental offers used to calculate LMPs must be capped at $2,000/MWh. Second, RTOs and ISOs must verify the underlying costs associated with an incremental energy offer exceeding $1,000/MWh before using such offers to calculate LMPs. Lastly, all resource types are eligible to submit cost-based incremental energy offers exceeding $1,000/MWh.

A copy of Order No. 831 can be found here. The rule becomes effective 75 days after publication in the Federal Register.

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